IVD Stunner: GE to Acquire Abbott’s Diagnostics Unit

Everything is sold but Abbott’s diabetes care and its molecular diagnostics business units

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CEO SUMMARY: General Electric Corporation made a dramatic entrance into in vitro diagnostics (IVD) by acquiring almost all of Abbott Laboratories’ IVD business division. Once the sale is closed later this spring, GE will be the second major imaging vendor to buy its way into the IVD business. With its deep pockets, celebrated management skills, and vast reach into hospitals across the nation and the globe, GE could prove to be a tough competitor.

EVER SINCE SIEMENS AG ACQUIRED Bayer Diagnostics and Diagnostic Products Corporation (DPC) last summer, everyone in the in vitro diagnostics (IVD) industry wondered when General Electric would make its move into the IVD industry and which diagnostics company it would buy.

Those two questions were answered on January 18, when General Electric announced an agreement to acquire most of the diagnostics business of Abbott Laboratories, Inc., of Abbott Park, Illinois. GE will pay $8.13 billion and the sale is expected to close by June, subject to “customary closing conditions” and regulatory approvals.

GE will acquire the bulk of Abbott’s diagnostics business and Abbott’s Point-of-Care diagnostics. During 2006, these businesses generated sales of approximately $2.7 billion.

Abbott Laboratories will keep two of its fastest-growing diagnostic business lines. It retains Abbott Diabetes Care (which involves glucose monitoring meters and test strips), and Molecular Diagnostics. Both business lines enjoyed double-digit rates of growth in recent years and expectations are that rapid growth will continue in these markets. In 2006, diabetes care generated revenue of about $1.15 billion while molecular diagnostics sales totaled about $140 million.

What General Electric gets for its $8.13 billion investment is one of the world’s major IVD companies. Abbott’s diagnostic business produces instruments, reagents, and other products in chemistry, hematology, immunoassay, and other areas of lab testing. GE will also get Abbott’s point-of-care testing (POCT) business, which has experienced double-digit growth since Abbot acquired I-Stat in 2003. (See TDR, March 15, 2004.)

Abbott’s Worldwide Sales

The change of ownership of Abbott’s diagnostics division will affect many laboratories in the United States and around the world. One of the world’s largest IVD firms, Abbott makes products that thousands of laboratories use worldwide. For this reason, many lab managers and pathologists will watch closely how GE operates its new IVD business division.

In the short term, not much is expected to change. Word is leaking out from inside Abbott that the existing IVD manufacturing facilities in Abbott Park will be unaffected for now. Administration, sales, marketing, and other operations will relocate to offices not far from the Abbott Park complex.

In fact, many lab directors have told THE DARK REPORT that they see the acquisition as a positive step. One reason is that General Electric is widely recognized for its efficient management culture. Therefore, some pathologists are confident the transition will go smoothly. Another reason is that these laboratorians believe GE has big plans for IVD. They say GE wouldn’t have paid $8 billion to get into in vitro diagnostics unless it had a well crafted business strategy.

GE Healthcare CEO

General Electric discussed some facets of its strategy. Joe Hogan, President and CEO of GE Healthcare, said, “Through this acquisition, we create the opportunity to integrate our broad-based competencies in diagnostics, life sciences, and healthcare information technology. In vitro diagnostics and in vivo imaging continue to become more important in providing comprehensive diagnostic solutions.

“Our capabilities combined with Abbott’s in vitro diagnostics and point-of-care diagnostic businesses,” he continued, “will allow GE to provide customers with better tools for the full care continuum, enhancing their decision-making capabilities in key disease areas such as oncology and cardiology, and enabling early disease detection, diagnosis, and treatment.”

There are several interesting aspects to this acquisition. For example, Abbott’s CEO, Miles White, has told employees that GE CEO Jeffrey Immelt approached him several years ago to express an interest in buying Abbott’s IVD business. If true, such interest indicates that GE has had a long-standing desire to enter the IVD market that predates imaging rival Siemens’ acquisition of Bayer Diagnostics and DPC last year.

IVD’s Growth Potential

Second, independent of GE’s ability to integrate imaging, informatics, and molecular diagnostics into an array of clinically useful services, GE considers in vitro diagnostics to have better growth and profit potential than several of its other main business units. For example, it is selling its plastics division.

Third, by contrast, Abbott considers the high-volume, routine diagnostics business to be low growth, low profit when compared with its pharmaceutical division. In 2004, Abbott sold Hospira, a hospital products company that it considered to have limited growth potential. So its sale of the diagnostics business unit is part of an ongoing corporate program to shed slower-growing businesses and invest in higher-growth opportunities.

Relative to each companies’ existing mix of businesses, that is why General Electric and Abbott Laboratories each considers this sale to be a win-win transaction. Further, both companies may recognize that GE’s core competencies can contribute more to the future success of Abbott diagnostics than if the business unit stayed at Abbott Laboratories.

This factor is the fourth interesting aspect to the transaction. General Electric has world class skills in several relevant areas. It possesses advanced engineering capabilities in automation design and operation. Most of the instrument systems Abbott Diagnostics sold are highly auto- mated and complex.

GE’s Service Presence

Next, GE maintains one of the world’s largest service organizations. Because of its imaging products, it has a sizeable service presence in healthcare, particularly in hospitals. That means it is likely that, across the United States, each day GE already has a service rep on site in larger hospitals. When the Abbott service team is added to its existing service team, GE is well positioned to offer improved service to laboratory customers at a lower cost.

On the financial front, GE has another benefit for laboratory customers. It is one of the world’s largest sources of business capital. When a lab is ready to buy large analyzers and automated systems, GE can put together competitive financing packages. Plus, since GE may already be financing the hospital’s imaging equipment, it has knowledge and existing relationships with hospital administration.

GE Bought Triple-G

Another point should not be overlooked. GE has a strong base in healthcare informatics. It sells imaging information systems. In recent years, it acquired Triple-G Systems Group, Inc., and actively sells this laboratory information system product to laboratories. This aspect gives it experience and skills to integrate healthcare informatics effectively with new generations of analyzers and lab instruments.

Collectively, GE’s core competencies explain why it believes it can develop further value from the existing Abbott Diagnostics client base. It already operates in the same hospitals where Abbott has laboratory customers. It knows the healthcare business. It sees opportunities to combine imaging and laboratory testing technologies to improve the early detection of disease. For these reasons, General Electric sees its entry IVD business as fully complementary to its healthcare business strategy. Finally, with both General Electric and Siemens AG now in the IVD business, it may only be a matter of time before Philips makes its own IVD acquisition.

Imaging, Informatics, IVD: The Dream of Integration

WILL IT BE POSSIBLE TO INTEGRATE imaging, informatics, and molecular diagnostics? General Electric’s public comments on this point strike the same chords as the public comments Siemens AG struck after its acquisition of Bayer Diagnostics and DPC. Clearly, both companies believe that new research and technology will make it possible to feed medical images and molecular markers to sophisticated software programs.

These software programs will sort through the imaging and molecular test data to identify relevant patterns. By combining imaging, informatics, and molecular diagnostics into an integrated diagnostic process, the output can provide clinicians with tools that support a more accurate and earlier diagnosis. It will be equally true that this blend of three inputs can identify relevant therapies and support close monitoring of the patient’s progress.

Recent research shows that new imaging technologies can detect ever-smaller details, including tumors and other malignancies. However, the sensitivity and specificity of these new technologies have been insufficient to justify the use of these new imaging technologies in clinical procedures.

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